Definition
Advance Ruling (Tax)
An advance ruling is a binding determination obtained from a designated authority on the tax treatment of a proposed transaction, before it is undertaken.
To gain certainty, a taxpayer — often a non-resident or a business contemplating a specific arrangement — can seek an advance ruling on how a transaction will be taxed. The ruling binds both the applicant and the tax department for that transaction, reducing the risk of later disputes.
Separate advance ruling mechanisms exist for income tax and for GST, the latter handled by state-level authorities with an appellate tier. Divergent GST advance rulings across states have, however, sometimes created uncertainty rather than resolving it, prompting calls for a national appellate body.
Related terms
- DTAA (Double Taxation Avoidance)A Double Taxation Avoidance Agreement is a treaty between two countries that prevents the same income from being taxed twice and allocates taxing rights between them.
- Transfer PricingTransfer pricing rules govern how transactions between related entities, often across borders, must be priced to reflect fair market value for tax purposes.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.